Note 4 - Fair Value Measurements

12 Months Ended

Dec. 31, 2022

Notes to Financial Statements

Fair Value Disclosures [Text Block]

4. Fair Value Measurements

The Company’s warrant liability for the January 2022 warrants, which was classified as a derivative liability on the consolidated balance sheet as of March 31, 2022, contained unobservable inputs that reflected the Company’s own assumptions in which there was little, if any, market activity at the measurement date and was classified as a Level 3 input. Accordingly, the Company’s warrant liability was measured at fair value on a recurring basis using unobservable inputs at each reporting period. On April 1, 2022, the warrants were exercised and converted to equity.  The warrants were reclassified to additional paid-in-capital at their fair value on the warrant exercise date of April 1, 2022, with the change in estimated fair value during the period being recognized as a component of other income (expense), net in our statement of operations. Refer to Note 2.

The fair value of the warrants was estimated using the Black-Scholes option-pricing model. For warrants that do not have a fixed termination date, the expected terms represent the periods that the warrants are expected to be outstanding based upon managements' estimate. The risk-free interest rates are based on the U.S. Constant Maturity treasury curve commensurate with the time outstanding. The expected dividend is zero as the Company has not paid nor does it anticipate paying any dividends on its common stock in the foreseeable future. The expected volatilities are estimated by our historical volatility over a similar time period.

The assumptions used in calculating the estimated fair value at the end of the reporting period and on the warrant exercise date represent the Company’s best estimate. However, inherent uncertainties are involved. If factors or assumptions change, the estimated fair value could be materially different.

The Company’s financial instruments consist principally of cash and cash equivalents, prepaid expenses, accounts payable and accrued liabilities. The following financial instruments are reported on the Company’s consolidated balance sheets at amounts that approximate current fair value.  The following table sets forth the Company’s financial instruments that were measured at fair value on a recurring basis by level within the fair value hierarchy (in thousands):

	Fair Value Measurements at
	December 31, 2022
	Total		Level 1		Level 2		Level 3
Assets
Money market funds	$	52,905	$	52,905	$	—	$	—
Liabilities
Warrant liability	$	26,881	$	—	$	—	$	26,881

	Fair Value Measurements at
	December 31, 2021
	Total		Level 1		Level 2		Level 3
Assets
Money market funds	$	49,217	$	49,217	$	—	$	—

Warrant Liability

The Company’s warrant liability for the October 2022 warrants which was classified as a derivative liability on the consolidated balance sheet as of December 31, 2022 contained unobservable inputs that reflected the Company’s own assumptions in which there was little, if any, market activity at the measurement date and was classified as a Level 3 input. Accordingly, the Company’s warrant liability was measured at fair value on a recurring basis using unobservable inputs at each reporting period. Refer to Note 2.

The fair value of the warrants was estimated using the Black-Scholes option-pricing model. The fair value of the common share has been adjusted for a discount for lack of marketability due to the uncertainty and timing of obtaining shareholder approval to increase our authorized number of common shares. For warrants that do not have a fixed termination date, the expected terms represent the periods that the warrants are expected to be outstanding based upon managements' estimate. The risk-free interest rates are based on the U.S. Constant Maturity treasury curve commensurate with the time outstanding. The expected dividend is zero as the Company has not paid nor does it anticipate paying any dividends on its common stock in the foreseeable future. The expected volatilities are estimated by our historical volatility over a similar time period.

The assumptions used in calculating the estimated fair value at the end of the reporting period represent the Company’s best estimate. However, inherent uncertainties are involved. If factors or assumptions change, the estimated fair value could be materially different.

At December 31, 2022, the Company estimated the fair values of the financial liability arising from the October 2022 Warrants using the following weighted average assumptions:

	October 2022 Warrants
	December 31, 2022
Expected term (in years)		1.9
Expected volatility		49.9	%
Risk-free interest rate		4.48	%
Expected dividend yield		0.00	%
Fair value of common share	$	1.25
Exercise price	$	0.7949

The following table provides a summary of changes in the estimated fair value of the Company’s warrant liability (in thousands):

	January 2022 Warrants			October 2022 Warrants
Balance at January 1, 2022	$	—		$	—
Issuance of warrants		10,000			—
Change in fair value		(1,228	)		—
Balance at March 31, 2022		8,772			—
Issuance of warrants		—			16,490
Change in fair value		(182	)		10,391
Reclass to additional paid-in-capital upon exercise		(8,590	)		—
Balance at December 31, 2022	$	—		$	26,881

The Company recognizes transfers between levels of the fair value hierarchy as of the end of the reporting period. There were no transfers within the hierarchy during the years ended December 31, 2022 and 2021.